Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. May 24, 2017

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1 Equity Research May 24, 217 Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 17E 18E 17E 18E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 7 TENCENT ICBC CHINA MOBILE CCB PETROCHINA HSBC BANK OF CHINA PING AN CHINA LIFE SINOPEC Source: Bloomberg GF events Date Event Location 24 May Modern Dental NDR Hong Kong Source: GF Securities (Hong Kong) A-Share Market Media: Digital marketing industry overview; short video, in-stream and OTT ads to be new growth drivers Online marketing revenue rose 32.9% to Rmb29.3bn in 216, of which Rmb175bn, or 6.3%, was attributable to mobile advertising (+75.4% ). Looking ahead, short video advertising is likely to be a key direction for upcoming advertising market development. In-stream ads are growing rapidly as they are widely used in social networking apps, news apps and vertical media. In addition, OTT (over-the-top) ads are also likely to demonstrate exponential growth in 217 as an emerging advertising medium. Please see text for subcategory performance and listcos market shares. Banking: Interbank and wealth management businesses to slow on strengthening regulation While the market has become less concerned about the impact of recent banking sector regulation given the CBRC s more relaxed attitude expressed at a press conference last Friday, we believe the overall policy stance of financial deleveraging remains intact. It is worth noting that the proportion of personal WMP and specialized institution client WMPs contracted by 3.2pp and 4.76pp respectively in 216, while that of interbank WMPs expanded by 7.84pp from 12 months earlier. We expect the growth in banks interbank and wealth management businesses to slow in the near future given the series of regulations introduced since the start of this year. Hong Kong Market Insurance: Recent measures will have no significant short-term impact on leading names; industry to benefit over the long term The CIRC recently introduced a series of measures for the industry covering product design, product sales, investment, and risk control. The core principles are that the insurance business should be protection-oriented, and that the financial stability of the insurance sector should be maintained. The measures will have no significant short-term impact on the leading companies listed in Hong Kong, as industry leaders are already more protection-focused and have good solvency margin ratios. Over the long term, the insurance industry will benefit from strengthened regulation. We recommend NCI and Ping An. Alex Fan, CFA, Head of Research, SFC CE No. ADJ672 alexfan@gfgroup.com.hk Gao Yedong, Editor, SFC CE No. BAI2 yedonggao@gfgroup.com.hk

2 May 24, 217 Media: Digital marketing industry overview; short video, in-stream and OTT ads to be new growth drivers Expanding mobile ads vs. shrinking PC ads Total advertising spending in China grew 8.6% to Rmb648.9bn in 216, accounting for.87% of the country s GDP and making China the second largest advertising market in the world. In particular, online marketing revenue rose 32.9% to Rmb29.3bn, of which Rmb175bn, or 6.3%, was attributable to mobile advertising, representing growth of 75.4%, while PC-based advertising declined for the first time sliding 2.9% to Rmb115.3bn. Market landscape Baidu (BIDU US, NR), Alibaba (BABA US, NR) and Tencent (7 HK, NR) recorded combined advertising revenue of Rmb176.7bn in 216, representing a collective market share of 61%. A-share listed advertising companies took a market share of 14.4% together with digital marketing revenue of Rmb41.7bn; their gross profit amounted to Rmb7.26bn with a GPM of 17.4%. Figure 1: Internet companies advertising revenue in 216 Sources: Company data, GF Securities (Hong Kong) Figure 2: A-share digital marketing revenue Sources: Company data, GF Securities (Hong Kong) Company Ticker 216 advertising revenue (Rmb m) online ad mkt co. revenue Alibaba BABA US 85, % 53.9% Baidu BIDU US 64,53.8% 22.2% 91.5% Tencent 7 HK 26, % 9.3% 17.8% Sohu SOHU US 7, % 63.3% Leshi 314 CH 3, % 1.4% 18.1% Weibo WB US 3, % 1.4% 87.1% NetEase NTES US 2,15 2.3%.7% 5.6% Sina (excl Weibo) SINA US 2,11-4.7%.7% 29.5% SouFun SFUN US 1, %.4% 18.1% Baofeng 3431 CH %.2% 35.1% Momo MOMO US %.2% 12. BAT subtotal 176,7 27.1% 6.9% Other companies subtotal 113,5 43.1% 39.1% Total online advertising market 29, % 1. Company Ticker 216 digital marketing revenue (Rmb m) Gross profit (Rmb m) GPM Chg in GPM co. revenue online ad mkt BlueFocus Com 358 CH 1,11 7.4% 1, % -6.4% % Leo Gp 2131 CH 5, % % -1.1% 72.8% 1.8% Keda Gp 6986 CH 4, % % -6.8% % Sky Dragon 363 CH 4, % % 82.1% 1.5% GD Advertising Gp 24 CH 3,26 4.3% % 3.1% 29.8% 1.1% Genimous Tech 676 CH 2, % 9.5%.7% Lecron Internet Media 3343 CH 2, % % 4.7% 88.3%.7% Spearhead Integrated Marketing 371 CH 1,47 2.6% % 5.4% 42.4%.5% Tensyn Digital Marketing 3392 CH 1,35-7.1% 2 1.4% % Simei Media 2712 CH 1, % % -1.7% 33..4% Zhongchang Big Data 6242 CH % 69..3% SZ Capstone 38 CH % 85.5%.3% Mindata 2137 CH % 66.8%.2% Mason Tech 2654 CH % 29.3%.2% Others 2, % % -1.2% 99.5% 1. Total 41,71 7, % 14.4% Total online advertising market 29, % 1. Subcategory performance The growth of search engine advertising slowed due to regulation and changes in user habits, and was overtaken by e-commerce advertising as the largest digital advertising category as the latter benefits from a rapidly growing e-commerce market, ongoing Page 2

3 May 24, 217 consumption upgrade and cross-border e-commerce development. Social networking advertising posted strong growth both in China and globally, while video advertising maintained solid growth. Furthermore, user experience for news platform advertising has been improved through targeted notifications and the use of in-stream ads. Figure 3: Search engine advertising growth Figure 4: E-commerce advertising growth Size of search engine advertising mkt (Rmb bn) Size of e-commerce advertising mkt (Rmb bn) E 218E E 218E Sources: iresearch, GF Securities (Hong Kong) Figure 5: Social networking advertising growth Size of social networking advertising mkt (Rmb bn) Figure 6: Online video advertising growth Online video ad revenue (Rmb bn) E 218E E 218E Sources: iresearch, GF Securities (Hong Kong) Figure 7: News/info platform advertising growth Figure 8: In-stream advertising growth Size of web portal & info provider advertising mkt (Rmb bn) 12 Size of in-stream advertising mkt (Rmb bn) % % E 218E E 218E Sources: iresearch, GF Securities (Hong Kong) Page 3

4 May 24, 217 Developmental trends. Short video ads: Going forward, short videos might become the dominant channel of information transmission amid the use of the mobile internet. The development of live streaming and short video platforms in 216 has added to the diversity and creativity of online advertising. Short video advertising is likely to be a key direction for the upcoming development of the advertising market. In-stream ads are growing rapidly as they are widely used in social networking apps, news apps and vertical media. In addition, OTT (over-the-top) ads are also likely to demonstrate exponential growth in 217 as an emerging advertising medium. Banking: Interbank and wealth management businesses to slow on strengthening regulation Sector regulation to focus on risk control Last week the CBRC issued a plan for the formulation of banking sector regulations this year, involving a total of 46 regulations to be formulated or revised. The regulator stressed upon the importance of preventing and controlling financial risks, or more specifically, minimizing systematic and regional financial risks. In particular, it called for the prompt establishment of regulations targeting the proxy holding of stakes in banks, asset management business operated by banks and bank wealth management business. Tougher WMP registration to eliminate rules circumvention A document was also issued last week regarding the timely and proper registration of banks wealth management products. In particular, it is required that such registration should reveal WMPs entire chain of ownership and expose any product embedding. Under this new requirement, fund pooling and illicit leveraging activities currently involved in collective asset management products are likely to face restrictions. While the market has become less concerned about the impact of recent banking sector regulation given the CBRC s more relaxed attitude expressed at a press conference last Friday, we believe the overall policy stance of financial deleveraging remains intact. Bank WMP annual report As of the end of 216, there were 74,2 outstanding WMPs issued by 497 banks, worth a total of Rmb29.5trn, up by Rmb5.55trn, or 23.63% from the start of the year, compared with growth of 56.46% in 215. It is worth noting that the proportion of personal WMP and specialized institution client WMPs contracted by 3.2pp and 4.76pp respectively, while that of interbank WMPs expanded by 7.84pp from 12 months earlier. We expect the growth in banks interbank and wealth management businesses to slow in the near future given the series of regulations introduced since the start of this year. We remain positive on sector Deepening financial deleveraging, along with strengthening MPA checks and interbank business regulation, is likely to put some short-term pressure on the banking sector. That said, NPL growth has eased while sector fundamentals are stabilizing. The sector is trading in a valuation range which we deem as fair to slightly undervalued. We prefer cheaply valued state-owned banks which have less policy risk and greater liquidity strength such as CCB (61939 CH) and ABC (61288 CH), while also highlighting China Merchants Bank (636 CH), Bank of Ningbo (2142 CH), Bank of Guiyang (61997 CH), Bank of Hangzhou (6926 CH) and Changshu Rural Commercial Bank (61128 CH). Insurance: Recent measures will have no significant short-term impact on leading names; industry to benefit over the long term What s new? The CIRC recently introduced a series of measures, including: universal insurance and investment-linked insurance should not be sold as by-products of main insurance contracts; initial survival benefit payouts from endowment insurance and pensions should be at least five years after the contract is made; an examination of China s Risk Oriented Solvency System to see if it needs to be improved; headquarters to bear joint responsibility for severe sales misconduct at the provincial branch level and face suspension of new business; encouraging insurance companies to invest in debt investment schemes that have been authorized by the State Council and are in line with national strategies, such as the One Belt, One Road initiative. No significant short-term impact on leading names The above-mentioned measures cover different areas of the insurance business including product design, product sales, investment, and risk control. The core principles are that the insurance business should be protection-oriented, and that the financial stability of the insurance sector should be maintained. The measures will have no significant short-term impact on the leading companies listed in Hong Kong, as industry leaders are already more protection-focused and have good solvency margin ratios. Over the long term, the insurance industry will benefit from strengthened regulation. Page 4

5 May 24, 217 Recommend NCI and Ping An NCI (1336 HK, Accumulate, TP:HK$46.1), a life-only company, achieved a 46.9% growth in regular FYP in 1Q17 (FYPs with durations longer than 1 years increased 78.4% ). Its product structure has improved as its bancassurance single premiums have come down to almost zero in the last two years. Ping An (2318 HK, Buy, TP:HK$58.1) posted rapid life insurance growth in 1Q17. Its agency-channel regular FYPs increased by 62%, and its life NBV increased by 6. We recommend NCI and Ping An. (Felix Luo, Research Analyst, SFC CE No. AQF573, felixluo@gfgroup.com.hk ) Page 5

6 May 24, 217 Rating Definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1 Neutral Expected sector relative performance ranges between -1 and 1 Cautious Sector expected to underperform benchmark by more than 1 Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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